Consumer surplus: is the extra satisfaction gained by consumers from paying a price that is lower than that which they are prepared to pay.
Producer surplus: is the excess of actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to accept for that output.
Figure 1.8 - Consumer and producer surplus
Allocative efficiency happens when competitive market is in equilibrium, where resources are allocated in the most efficient way from society’s point of view.
- Social surplus (consumer + producer surplus) is maximized.
- Marginal social benefit = Marginal social cost